Tuesday, November 18, 2008

This is not the time to bail on General Motors...

While the debate about whether the government should bail out Detroit rests on largely theoretical grounds, the failure of General Motors in this economy would have a significant and sustained negative impact on the nation's industrial base. Some argue that saving General Motors is merely a stop gap measure to prop up an ailing industry giant that cannot ever again emerge as a world leader. While there is some evidence to support the contention, I would argue that General Motors can and will emerge as a strong player in the global marketplace. It should certainly be given some help to attempt such a recovery.

As a car buff for nearly the last thirty plus years, I have often been a critic of Detroit and its ailing car makers. The early eighties saw the atrocious Cadillac Cimarron, a compact car built upon GM's J platform. Unfortunately, the Cimarron was nothing but a Chevrolet Cavalier with a Cadillac badge. Years of such antics did not help General Motors compete with the Japanese and German automakers, who continued steadily towards technologically advanced vehicles that were aesthetically pleasing, reliable and safe. GM's mandate has not always been to build world class cars without regard to other considerations. In fact, General Motors, like much of the US industrial base, has been hamstrung by prehistoric union arrangements that have kept labor and medical costs astronomically high. It is hard to build a world class car when nearly $2,000 of every car you build pays for entitlement programs for past and current employees. The market may have wanted GM to change, but its past often did not allow for it. Surely unions did not account for all of GM's woes, and management shares significant culpability, but organized labor did play an important role in where GM is today.

Remember $19 car rentals at Avis, Hertz and Budget in most markets? Those rates did not come easily. They came from years of Detroit's subsidization of auto rental companies, which served as repositories for vehicles the markets could not and would not absorb. GM and other domestic auto producers needed to manufacture those vehicles to finance and pay for the massive labor and health care entitlement program obligations they had accumulated over time. Despite its baggage, over the past two years, General Motors has made significant strides to returning to a respectable position amongst global auto makers. Transformation of an industry that for years served as a jobs bank for nearly three percent of the US labor force cannot happen overnight. First must come products, which after a drought of nearly a decade, have come to GM. Products like the new Cadillac Escalade, the 2008 Cadillac CTS Sedan, the Chevy Corvette, and the 2008 Chevy Malibu are vehicles that can compete on a global scale. The upcoming Chevrolet Volt, and the re-engineering of the energy supply for consumer vehicles that comes with it, will put GM and America in a strong position for automotive leadership. The problem is time. GM needs more of it, and so does America. The aid that GM needs can come in the form of legislative assistance through revision of "closed shop" rules in certain states, it can come in the form of incentives for new products, and it can come in the form of tax incentives and loan guarantees. I haved argued that all of them will be needed in some form or another.

No strong industrialized global economy currently exists without a healthy or emerging automotive industry. Manufacturing in Germany and much of continental Europe has survived on the wings of Daimler-Benz, BMW, Volkswagen, Volvo, Fiat and Renault for years. England's manufacturing fortunes, once uplifted by Rover and Jaguar, have waned as those brands were acquired and traded. Japan and Korea all have growing automotive industries and China and India are waiting in the wings with domestic offerings of their own. America cannot afford to lose the industrial base that auto manufacturing provides. Perhaps never, but definitely not now.

We also cannot risk the industry on the theory that foreign automakers will somehow fill in the gap left by the US companies. The retooling and re-engineering required to allow suppliers who service GM, Chrysler and Ford to serve purely foreign manufacturers will take years, not months, and will spread the "rust belt" well into America's manufacturing heartland. Millions of US jobs are vested in the hundreds of automotive suppliers that feed the big three. In this case, the sum is significantly greater than all of its parts. I hope the current outgoing Congress will show leadership on this issue and give GM and its ailing siblings the loan guarantees and aid they need to continue the transformation of America's important auto industry from an outdated jobs bank into a potent force for global automotive leadership.

For another viewpoint, see Mitt Romney's article in the New York Times.


rajat said...

This sums it up nicely,

Abhijit "Beej" Das said...

In hindsight, the bailout seems to have been a success for GM. Let's see if Detroit's momentum continues.